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Simon Collins: Managing conduct risk under the FCA

A review of TCF management could provide a starting point for compliance on conduct risk.


The scenario: As the CF10 compliance officer of a retail intermediary firm, you recently attended a seminar which focused on the challenges around ‘Conduct risk behaviour and the FCA’. You noted that many of the messages at this session reflected those of the FCA risk outlook 2013 and this has prompted you to question your own firm’s position on conduct risk and look again at whether your firm is appropriately positioned to deal with the new more intensive focus of the new regulator in this area.

Points to consider: In 2011 the FSA defined conduct risk as “the risk that firm behaviour will result in poor outcomes for customers”. This has now been picked up and the FCA is developing it further. It is seeking to fulfil its statutory objectives on consumer protection by looking at this area in a focused manner with firms.

Your reading of the position is that the FCA is determined to take action against firms who cannot provide evidence of good consumer outcomes. In your role as compliance officer you see the obvious parallels with treating customers fairly but things have moved on and you need to demonstrate good outcomes for customers. As such, you have decided to review what your firm has done with TCF in the past and how this demonstrates how defined customers’ outcomes have been embedded in to the operation and culture within your firm.

Given that the board of the company has also struggled with some TCF management information you produce and not given this the focus you feel is needed, you have also realised that there is probably a need for a fresh look at the MI to see how this is used and what it shows as part of the assessment of whether what you and the firm is doing is still really fit for purpose. You also feel that looking at the impact and outcomes of your customer service offerings post-RDR might be a good idea.

There remains much work for the FCA to do in developing its approach to assessing conduct risk’ and this will vary according to firm size, the nature of any risks and thematic work. However, the general principles seem clear; that any action taken by a firm should be with the end consumer in mind.

Other areas to look at include the firm’s business plan. What does the business have planned by way of innovations and strategies in the coming year? Have these innovations been developed with the consumer in mind, in conjunction with the bottom line? Are these innovations short term in nature or sustainable?

It is clear from the session you attended that the FCA has already stated that short-term strategies which support profits can “provoke risky behaviours and poor practices”. Historic mis-selling scandals that provoked the conduct risk revolution are obvious examples of profiting from the naivety of consumers.

Your firm may not be involved in product design and promotion but it is clear that firms will now be expected to carefully challenge any strategies they employ – particularly those with the intended impact of bring about short-term profits – and be absolutely certain that the customer is being treated fairly throughout the process.

At the session you attended you were interested to note that the regulator’s recent work in the GI market relating to ‘add-on’ products gave a clear indication of its approach on one level. Are products and services valuable to clients? Do they provide value for money? Do they satisfy what is an actual identified need?

You therefore feel confident that a careful and proportionate review of the firm’s approach to TCF with a fresh focus on your customer outcomes and conduct risk will prepare the firm for any future challenges in this area and provide evidence of a pro-active approach to the firm’s compliance with its regulatory requirements.

Simon Collins is managing director at RGP Compliance



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There is one comment at the moment, we would love to hear your opinion too.

  1. So now we have to demonstrate that we have considered both TCF and RCR. One compliance network has introduced a self questionnaire to see if you are looking at RCR and at the last count it amounted to 120 questions…..
    So at staff and manager meetings you are expected to consider and document both TCF and RCR, ask yourself whether you have you got the necessary MI with examples where you have used it to modify your behaviour, conducted due diligence where necessary, assessed and resolved conflicts of interests, surveyed your customers in relation to outcomes, assessed any risk to your clients in respect of your remuneration arrangements, and does your service and marketing proposition stack up?
    There is a real problem developing here between the compliance view, the FCA view and the poor so and so in the middle who understands what is happening but is at a loss as to what is really expected such that his/her response is commensurate with the size of the firm and the risk it presents.
    No doubt too there is a confounded patronising roadshow we have to attend to show our commitment to RCR.

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